#TuesdayTips – Indicators
#TuesdayTips is a new series of posts I will be doing where every Tuesday, I will share some small but crucial tips, strategies and answer questions I receive from you traders.
Today’s post is going to be short and easy. It’s the last foundation stone before we get to your first strategy!
I explained to you what trends are in a previous post. Since we are going to make trades based on trends and we need something to help spot them.
When driving, before taking a turn you use an indicator to show which side you are turning. Just like that there are indicators which we can use to make money in the stock markets!
They generally show what way the trend is headed and we will use these indicators to make money using trends.
The best part is that these indicators are available for free and very very easy to use.
I think a quick example will help you get an idea of what an indicator in the stock market looks like and how we use them.
This indicator is called the Stochastic Oscillator. Sounds fancy, doesn't it? It's really simple. Let's see how it works.
I have below a simple candlestick chart of Maruti Suzuki Ltd. from moneycontrol.com (Refer to end of my post on candlesticks to know more)
Now, to this chart I add a Stochastic Indicator. (See image)
After doing that, you will notice at the bottom, we now have a new stochastic chart inside the existing chart. (Circled)
The new chart at the bottom is our indicator. Simple.
Now how does it give indications of trends? That's very simple as well.
If you see, usually when the green line in the stochastic chart crosses and goes above the red line stock prices rise.
And usually, when the green line in the stochastic chart crosses and goes below the red line stock prices fall.
That is how easily the stochastic oscillator gives indications.
This was a very basic introduction on just one type of indicator. I did not explain what it was or how it is calculated. I just showed you they are easy to use and more importantly, free!
If you are confused with the 'stochastic indicator', that's okay. You will learn more soon. What you need to understand today is just this much- We will use something called indicators to spot trends.
There are more than 50 such indicators available(all free) and we will explore many more such indicators every time you learn a new strategy.
One last thing about indicators that you must know.
If you look at the chart carefully and read my language, I stressed on the word usually. This is because not all indicators of stocks are 100% right all the time. If it were so, everyone would be making money!!
Indicators can help us to spot trends before most others do. They may however be wrong sometimes.
What we will do therefore is that, when we make a strategy, we will be careful and develop a method to know when to trust an indicator.
And that is all there is to being a swing trader!!
In the next post, I will be introducing you to your first strategy (See Here). In order to understand it you must be clear on the concept of candlestick charts that I shared in my previous post. In case you missed it, read it here.
I hope you are having fun reading the blog! I would like to receive your feedback and would be happy to answer any questions you may have. Reach out to me by clicking here.
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Also, now would be a good time to share this blog with your friends so that they can be at the same level with you when you learn the first strategy and when you make a profit you can tell your friend excitedly how it worked!
See you at the next one!